How much of AFLAC's business depends on Japan, and what does that mean for investors?

AFLAC Japan accounted for 85% of 1995 total revenues and 90% of total assets. Results are therefore highly sensitive to the yen/dollar exchange rate, Japanese regulation, and the Japanese economy. Management argues that yen-denominated premiums, investments, and claims are naturally matched, so translation does not change real economic results, but reported U.S. dollar earnings can swing significantly.

What is the impact of the yen/dollar exchange rate on reported earnings?

A stronger yen boosted 1995 operating earnings by about $0.15 per share versus 1994. The yen weakened from the third quarter of 1995, and management expects a weaker yen in 1996 to reduce dollar-reported earnings. Its 1996 guidance assumes an average rate of 105 yen per dollar, versus 94.10 in 1995, which would still leave operating EPS up about 6% in dollars even with 15% growth before currency effects.

Is the investment portfolio high quality, and what are the main risks?

About 49% of fixed-maturity securities were rated AAA and 22% AA, with 4% BBB. Japanese government bonds were roughly 35% of fixed maturities. Key risks include a duration gap (policy liabilities about 13 years versus about 9 years for related assets), reinvestment risk if yields stay low, and private placements, which rose to 23.1% of fixed maturities. The large unrealized gains depend on current interest rate levels and could reverse if rates rise.

What are the major legal and regulatory risks disclosed?

The IRS has proposed adjustments to U.S. tax returns for 1989-1991 concerning foreign tax credit computations. If upheld, these would materially affect results for those years and later years, although management believes it will prevail. Litigation in Alabama, where punitive damages can be large, is pending but considered not material. Japan is also moving toward deregulation of insurance, which could increase competition, though management believes its low-cost distribution model should protect it near term.

How is AFLAC returning capital to shareholders?

AFLAC paid cash dividends of $0.338 per share in 1995, up 13.4%, and has grown its dividend at a 13.7% compound rate over 10 years. It also repurchased 8.2 million shares during 1995 for $224.2 million, funded partly by yen-denominated borrowings. Cumulative authorizations reached 21.4 million shares, of which 14.5 million had been bought by year-end 1995.

AFL 10-K FY1995 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 26, 1996. Cited figures are marked; the original filing is the authoritative source.

AFLAC Incorporated's 1995 10-K shows a company whose results are overwhelmingly driven by its Japanese supplemental health (cancer expense) franchise.

Consolidated total revenues rose 17.7% to $7.19 billion^a and net earnings grew 19.2% to $349.1 million, or $2.33 per share (adjusted for the three-for-two split payable March 18, 1996). AFLAC Japan generated 85% of total revenues and 90% of total assets, and the company describes itself as the world's leading writer of cancer expense insurance. Shareholders' equity reached $2.13 billion, up 22% for the year, and book value per share rose to $15.03.

Investment assets grew 25.3% to $20.0 billion, and net investment income climbed to $1.02 billion^b. Investors should weigh several items. Reported dollar results are heavily affected by the yen: the yen weakened in late 1995, the company's objective is to grow operating EPS 15% before currency effects, and management's 1996 guidance assumes a 105 yen/dollar average versus 94.10 in 1995.

The Japanese government bond yield fell during 1995, which pushed up unrealized gains on fixed-maturity securities (the fair value of those securities exceeded amortized cost by $2.6 billion^c) and the company is exposed to a duration mismatch, with policy liabilities averaging about 13 years against roughly 9 years on the related assets. The company is also contesting IRS proposed adjustments for 1989-1991 that could significantly affect future results, and it has an active share repurchase program (14.5 million shares bought under authorizations totaling 21.4 million).

Overall, the filing portrays a financially strong, highly profitable insurer with rapid growth and a large share buyback. The main risks are concentration in Japan, currency translation, Japanese regulatory and deregulation developments, and the tax dispute.

02—Key points

Key Highlights

Net earnings rose 19.2% to $349.1 million ($2.33 per share), and total revenues grew 17.7% to $7.19 billion.
AFLAC Japan provides 85% of revenues and 90% of total assets, with cancer expense insurance as the core product; the company calls itself the world's leading cancer expense writer.
Total investments reached $20.0 billion, up 25.3%, with fixed-maturity securities carried at fair value and a $2.6 billion net unrealized gain.
Shareholders' equity grew to $2.13 billion, and book value per share rose to $15.03 (split-adjusted).
Operating EPS growth was 23.3% in reported dollars but 15.3% excluding currency effects, which management uses as its internal growth target.
A three-for-two stock split was declared (payable March 18, 1996), and the company repurchased 8.2 million shares in 1995 under a program authorized for up to 21.4 million shares.
The IRS has proposed adjustments for 1989-1991 related to foreign tax credits; management is contesting them and believes its position will prevail.

03—Questions

Frequently Asked Questions

How much of AFLAC's business depends on Japan, and what does that mean for investors?
AFLAC Japan accounted for 85% of 1995 total revenues and 90% of total assets. Results are therefore highly sensitive to the yen/dollar exchange rate, Japanese regulation, and the Japanese economy. Management argues that yen-denominated premiums, investments, and claims are naturally matched, so translation does not change real economic results, but reported U.S. dollar earnings can swing significantly.
What is the impact of the yen/dollar exchange rate on reported earnings?
A stronger yen boosted 1995 operating earnings by about $0.15 per share versus 1994. The yen weakened from the third quarter of 1995, and management expects a weaker yen in 1996 to reduce dollar-reported earnings. Its 1996 guidance assumes an average rate of 105 yen per dollar, versus 94.10 in 1995, which would still leave operating EPS up about 6% in dollars even with 15% growth before currency effects.
Is the investment portfolio high quality, and what are the main risks?
About 49% of fixed-maturity securities were rated AAA and 22% AA, with 4% BBB. Japanese government bonds were roughly 35% of fixed maturities. Key risks include a duration gap (policy liabilities about 13 years versus about 9 years for related assets), reinvestment risk if yields stay low, and private placements, which rose to 23.1% of fixed maturities. The large unrealized gains depend on current interest rate levels and could reverse if rates rise.
What are the major legal and regulatory risks disclosed?
The IRS has proposed adjustments to U.S. tax returns for 1989-1991 concerning foreign tax credit computations. If upheld, these would materially affect results for those years and later years, although management believes it will prevail. Litigation in Alabama, where punitive damages can be large, is pending but considered not material. Japan is also moving toward deregulation of insurance, which could increase competition, though management believes its low-cost distribution model should protect it near term.
How is AFLAC returning capital to shareholders?
AFLAC paid cash dividends of $0.338 per share in 1995, up 13.4%, and has grown its dividend at a 13.7% compound rate over 10 years. It also repurchased 8.2 million shares during 1995 for $224.2 million, funded partly by yen-denominated borrowings. Cumulative authorizations reached 21.4 million shares, of which 14.5 million had been bought by year-end 1995.

04—Continue

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